Rethinking Luxury Cars as Chinese Military Switches Plates

Officers of China’s navy display the new (left) and old military car licence plates in Hebei province.

Enforcement of tougher military license plate rules, starting Wednesday, by China’s People’s Liberation Army signals the start of a broad drive against ostentatious consumption, prompting global auto makers such as Daimler AG’s Mercedes-Benz and Audi AG to re-examine their positioning in the market.

Cars with special military plates enjoy many benefits. Vehicles with military and armed police plates are often seen violating traffic regulations but are rarely stopped by the police, and are also exempt from charges at toll stations. Military plates are sometimes illegally auctioned off to civilians, according to Communist Party insiders and people involved in the luxury-car business.

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But the new restrictions could see foreign-brand luxury cars purged from the military fleet.

The state-run Xinhua news agency reported Sunday that certain high-end luxury cars with engines of three liters or more and priced more than 450,000 yuan (around $72,000) wouldn’t qualify for licenses. In the Chinese market, brands falling into this category typically include models by German brands such as Mercedes-Benz BMW and Audi.

Earlier state media reports from March also said many luxury brands belonging to global auto makers won’t receive the new military license plates unless they are registered as military property.

“The new policy is about more than just replacing license plates. It is intended to reduce abuses of power and the neglect of duty, as well as improve public trust in the military and maintain social harmony,” the Xinhua report said.

Military license plate reform comes amid a broader anti-corruption push by the Chinese government under President Xi Jinping aimed at wiping out signs of excess among the country’s ruling class.

The number of cars in the government fleet is not to be sniffed at: 750,000 such cars were sold in 2012, according to estimates from the China Passenger Car Association. More than 70% of government fleet sales were foreign brands, down from more than 80% in 2011. Passenger car sales increased around 7% year on year in 2012 to around 15. 5 million cars, according to statistics from the semi-official China Association of Automobile Manufacturers. The premium-car market accounts for 9% of all passenger-car sales, according to McKinsey & Co.

The tighter rules come at a time when industry players warn of slowing growth in sales of more expensive cars in China. BMW AG recently forecasted growth in the “high single digits” for 2013—a far cry from the 40% growth in sales it had in 2012 that brought its total sales in China to around 326,000 vehicles. In the first three months of this year growth had slowed to 7.4% for BMW-brand cars.

The sight of luxury cars and SUVs sporting military plates is cause for widespread resentment among regular Chinese citizens. Now foreign auto makers are keen to distance themselves from their association with government purchases while making efforts to broaden their appeal to a broader range of consumers with smaller, more affordable models.

“We’re basically not present in this (government fleet) market so if there is an impact it is much less for our brand than at least one of our competitors,” Dieter Zetsche, chairman of the board ofmanagement of Daimler and head of Mercedes-Benz Cars, told reporters at the recent Shanghai auto show.

Volkswagen AG’s Audi, the largest luxury-auto maker in China, has been a popular choice among China’s ruling classes, but the company says it is shifting its attention to other buyers.

“We’re not targeting government customers anymore,” Audi’s China president Dietmar Voggenreiter said recently in Shanghai. “More than 90% of our sales are generated from private customers, and only 10% are typical so-called fleet customers. But by far the clear majority of these fleet companies are big companies. We have a very small portion of direct government sales in the portfolio,” he said.

Mr. Voggenreiter insisted Audi is no longer a brand for black limousines. “Some have still have this picture in mind,” he said. “(But) we are selling more than one third of our cars in the area of SUVs, sports cars, etc. We’re not anymore a business or government brand,” he added.

Daimler’s Mr. Zetsche said as Mercedes-Benz begins to introduce more compact cars to China, the brand’s positioning would also change.

“Originally the brand was seen as the S-class brand, and certainly that is very much the high end, it is understood as defining the top of the market,” he said.

This was a positive thing, he said, but added in light of recent moves to curb conspicuous consumption, particularly among government officials, such positioning “might be a risk as well.”

In light of this, the company plans to introduce more compact models to China. “I think our opening the brand making it more accessible more affordable is generally a good thing,” said Mr. Zetsche.

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